Few plan to buy Lamborghinis with their pension pots

http://www.theguardian.com/money/2015/jan/14/pension-pots-annuities-freedom

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The number of people planning to spend their retirement savings on a fast car or a once-in-a-lifetime holiday when the new pension freedoms come into force in April will be minimal, according to a report published on Wednesday.

The report finds that 70% of those aged over 55 would prefer their pension to deliver a guaranteed income for life and only 7% said that paying for big-ticket items like a car would be their priority.

The study from the International Longevity Centre comes less than three months ahead of the biggest reforms to the pensions system ever made. From April, savers with defined contribution pension schemes will be able to access their funds as they wish during retirement, allowing them to draw down an income directly from the fund, rather than buying an annuity.

The study highlighted a worrying lack of planning, even by those months from retirement, and a lack of understanding about annuities.

Some 60% of people over 55 have not made a plan for retirement, the ILC said, and, even amongst those with less than a year to go before finishing work, more than 40% still have no firm idea of what they will do. On top of this, of the 5,000 surveyed, only half knew what an annuity was “quite or very well”.

“Even after decades of pension saving, many people have no understanding of the most important aspects of the pension system, which leaves them at risk of making poor decisions,” said the government’s business champion for older workers, Ros Altmann.

“The opportunity of more freedom and choice in future has the potential to deliver better value from retirement savings, but much work still needs to be done to help savers understand their options.”

The report has also raised concerns about people’s understanding of the tax implications of withdrawing all their pension savings in one go. The first 25% of pension cash is tax free but the rest will be taxed at the individual’s marginal rate – so many people could face a 40% charge.

Yet only half of those surveyed by the ILC realised that withdrawing the money in small amounts over a number of years would reduce the tax burden and one in 10 wrongly thought that the best thing to do would be to withdraw one big lump sum.

Earlier this week, the government confirmed that the guidance for people negotiating the new retirement freedoms will be called Pension Wise. The service will be provided by the Pensions Advisory Service and the Citizen’s Advice Bureaux and will be free of charge.

Maggie Craig, acting head of savings and investments at the FCA said there was still a need for extra consumer protection to protect people from guidance scams.

It will be a criminal offence for companies to say it is a guidance provider if it is not but there will also be an onus on pensions providers to make sure people are aware of the implications of rejecting guidance, she said.

“We will require providers not to just let it go if people choose not to take up the guidance guarantee [Pensions Wise],” she said. “The provider needs to recommend that those people do take the guidance and providers will also have to touch on the tax implications of any decisions [the individual makes].”